Organizations across the globe are always going to need IT assets. Getting IT assets can be an expensive venture, especially if there is no one tracking, maintaining, and monitoring the assets. This is why the IT Asset Management (ITAM) industry has developed and cultivated. When done correctly, managing these assets saves organizations both hard and soft dollars, increases Return on Investment (ROI) rate, and decreases the Total Cost of Ownership (TCO). It also increases productivity and it adds support to protecting the organization from data security risks. These are the major goals the ITAM profession strives for, and best practices help to reach this goal.

A major issue that organizations and IT Asset Managers face is how to categorize IT asset acquisitions. Serious consideration needs to be placed on these expenditures because how they are categorized will give an organization varying benefits. These benefits need to be heavily weighed by the IT Asset Manager, along with the financial team, to decide which ones will be more helpful to the organization in the long run. These categorizations are known as Capital Expenditures (CapEx) and Operational Expenditures (OpEx), and they are two categories of business expenses. The main difference between them that concerns the financial team and the IT Asset Manager, is the way they are treated regarding taxes.

CapEx vs. OpEx

The reason that the differences between the expenditures need to be known is because of how taxes work with the organization. Both CapEx and OpEx refer to how money is paid out of an organization. CapEx consists of major purchases that are going to be used in the future. The life of the purchases continues beyond the accounting period that they were acquired in. OpEx are daily costs that are needed to maintain business function and continuity. These are short-term costs that are purchased and used up in one accounting period. CapEx are tax write-offs. OpEx are fully deductible, meaning that OpEx can be subtracted from the revenue when figuring out the profits and losses of an organization. These differences make it necessary to have a separate budget for both.

Below is a table showing the how the two business expenses are reflected during an accounting year:

Tax Period 1 2 3 4
OpEx Costs
CapEx Costs

Capex

Capital expenses are the funds that organizations use to purchase major assets, such as equipment and hardware, or services that the organization will use for more than a year. Organizations may incur CapEx to improve their fixed assets, which, from an accounting viewpoint, are treated as noncurrent assets. This means that they are not used up in the first year. Capital expenses lead to future benefits.

Capex budgets demonstrate how much an organization spends to invest for the future. This is important because business analysts that are interested in CapEx budgets of large organizations can decipher which organizations to invest in. CapEx can change from year to year, so expenditure history is often considered. This is important for IT Asset Managers and the financial team to know so they can construct a good expenditure history, which can lead to more investors. An organization may choose to make a CapEx and only deduct a small amount of it as an expense when they want to boost their earnings and book value. This brings a higher value of assets into their balance sheet and a higher net income that they can report to investors. Tax write-offs are another benefit of CapEx.

CapEx are recorded as assets on a balance sheet under the property, plant, and equipment section. It is also recorded under investing on the cash flow statement since it is a cash outlay for that specific accounting period. When an asset is in use, it depreciates over time. Each year, a piece of the fixed asset is consumed. The use and wear of the fixed asset is represented by the depreciation. Organizations are able to deduct the depreciation amount on their tax returns. CapEx frequently depreciate over a period of 5-10 years. Eating these expenses now can create profit in the future. CapEx will not immediately bring a positive impact, but it is important for future income and production.

Capital expenses include things like IT asset hardware purchases, equipment purchases, building expansion, etc. It can also be a new asset that will improve and increase the productivity of an existing asset. The nature of an organization’s CapEx depends on what industry it works in. Every industry is going to have different CapEx. Some industries need a lot of capital investment while others do not need as much. When viewing and comparing CapEx with competitors, it becomes easier to know what range a CapEx for an organization should be at. IT Asset Managers can learn and understand what is a good amount of CapEx by getting together with the financial team. CapEx can vary greatly from year to year, so the financial team might have a different goal amount for CapEx each year.

OpEx

OpEx reflects the cost of doing business. They are the necessary expenses that an organization spends to maintain daily business functions. These expenses include things like utilities, salaries, property taxes, etc. When expenses are deducted, it reduces income tax that is then levied on net income. OpEx can be viewed as more money available at the present time rather than in the future. Another benefit of OpEx is that it is fully tax-deductible in the year they are made, unlike capital expenses.

If OpEx is too high, it can be a source of money loss for an organization. Going into debt to pay for OpEx is a problem since these expenses do not contribute to future plans and growth. In contrast, going into debt for capital expenses is beneficial because of the future benefits the expenses will bring. IT Asset Managers need to look for ways to reduce the organization’s OpEx since operational expenses are the majority of an organization’s ongoing costs. When looking for financial reductions, remember to avoid large decreases in quality or production output.

Between the two, organizations tend to choose OpEx over CapEx due to how taxes play out for the organization. This is especially true if the organization has limited cash flow and wants to be able to deduct the total cost of the asset in a tax year. An asset that might typically qualify as a CapEx can be considered an OpEx if the organization leases it rather than buying it. This leads organizations to lease hardware from vendors instead of purchasing them. Since the lease is part of day-to-day operations, it would be considered an OpEx.

CapEx, OpEx, and ITAM

Consider the major goals of an organization. Finding and improving cost-savings should always be at the forefront of the IT Asset Manager’s mind. An organization cannot perform well if the financial matters are not handled well. This is where the Financial Management Key Process Area (KPA) shows its importance. KPAs are processes an ITAM program needs to have in order to be successful and reach optimum flow. There are a total of 12 KPAs, all of which have been identified by IAITAM. The Financial Management KPA aims to find cost-savings and improve an organization’s finances through things like increasing ROI, decreasing TCO, finding soft dollar savings, etc. While working with CapEx and OpEx, the Financial Management KPA is an important ITAM best practice to keep in mind.

In order to decide what will put the organization in a better position, the IT Asset Manager needs to figure out whether an IT asset purchase or lease would be better written as a CapEx or OpEx. How will the organization benefit from either? What is the state the organization is in that would make one more beneficial than the other? Over time, what was once considered more helpful as a CapEx may be more beneficial to be categorized as an OpEx.

Keeping financial goals in mind will help the IT Asset Manager to make the wisest decisions. If the IT Asset Manager is uncertain about what the financial goals are, they can meet with the executives to get the best information right from the source.

ITAM and the financial team

The mindset an IT Asset Manager must adopt is to make themselves as helpful as possible. What can an IT Asset Manager do to help the organization the best way possible? In order to know how to effectively help, IT Asset Managers should meet with the financial team. This will keep the IT Asset Manager updated on which decisions to make because the financial team is going to have the data and statistics on the organizations. They will be able to give informative advice that was heavily considered. Helpful questions to ask the financial team are:

  • How can I lower operational expense?
  • What information do you need from an IT Asset Manager’s perspective?
  • If one business expense is chosen over the other, what would be the effect on the organization’s taxes?
  • Is the Chief Financial Officer (CFO) aware of the benefits of one business expense over another?

With the goal of finding cost-savings in mind, take the time to decipher whether OpEx or CapEx is more appropriate for each IT asset acquisition from an ITAM perspective. Consider why certain assets should be treated one way over another. The financial team usually considers IT assets to be CapEx, but this is not always the most beneficial for the organization. Sometimes OpEx can be used instead, which can lead to more savings compared to CapEx. This information will need to be explained and communicated to the financial team. There are things about IT assets that the financial team does not know and will not factor in if the IT Asset Manager does not tell them.

The IT Asset Manager should aim to be as helpful as possible with these matters. This means the IT Asset Manager will need to educate the financial team and communicate ITAM knowledge that might contrast what the financial team believes. The Communication and Education Management KPA really shines here because the IT Asset Manager needs to be informative and listen well to get the best results. The Communication and Education KPA is designed to allow an IT Asset Manager to effectively communicate to others while educating them on important matters regarding ITAM.

In order to be the most effective communicator, the IT Asset Manager may need to do prior research on who is working on the financial team in order to know what will be the best methods to educate the team. If the financial team is busy and overloaded, they may not want to make time for a meeting or have a long discussion. The IT Asset Manager needs to find a way around their reluctance while making the message easy to understand quickly. If the financial team is skeptical and does not believe what the IT Asset Manager presents, the IT Asset Manager may need to prepare factual documents that will prove their point.

During the discussion with the financial team, IT Asset Managers should try to place themselves into a position where they can still ask how they can help while also giving vital information to the financial team. This makes the financial team more willing to hear what the IT Asset Manager is trying to convey once they realize that the IT Asset Manager is trying their best to help the organization.

Something that should happen, if possible, is to make the CFO aware of why IT asset acquisitions may need to be CapEx over OpEx or vice versa. The IT Asset Manager is looking beyond just the value of the hard dollar savings, which may mean more soft dollar savings. The financial team is usually not as pleased with soft dollar savings compared to hard dollar savings. They may not consider the value of the other benefits the soft dollar savings may bring. A CFO will understand the value of the soft dollar savings once the IT Asset Manager informs them on the other benefits that come along with the soft dollar savings. The Communication and Education KPA needs to be used when discussing the value and benefits of choosing one expenditure over another. Learn about the CFO and consider different communication strategies when planning out the meeting. When the conversation with the CFO is taking place, come equipped with statistics, factual numbers, and clear evidence. CFOs are busy with their workload and may not want to beat around the bush regarding these matters. It is important to be as informative as possible during this conversation. Let them know what is going on and educate them on the positive consequences that can come from either option.

When should an IT asset acquisition be CapEx or OpEx?

To decide whether a CapEx or an OpEx should be considered for an IT asset acquisition, determine which will benefit the organization more. What state is the organization in? Is it more pressing to improve the expenditure history to get more investors and get more tax write-offs, or is it more important to have the acquisition be fully deductible?

For example, an area where an acquisition may be more beneficial as an OpEx is in matters regarding the cloud. Since the cloud is an ongoing subscription license, it may be more beneficial as an OpEx. Since most IT asset acquisitions are usually considered CapEx, this is a shift for the financial department. Making the cloud acquisition an OpEx can be troubling if there is no explanation or communication regarding the matter. The CFO is going to see the balance sheet, see the increased costs, and realize there is an absence of tax write-offs. With no explanation, the CFO will veto any request for cloud services. This can be amended if the IT Asset Manager discusses the reasoning behind the decision. The IT Asset Manager will need to show the math and explain the difference between hard and soft dollar cost-savings. The goal is always to do what is best for the organization, so patience is key when educating others or listening to other’s advice.

Consider unusual times within the organization where typical CapEx and OpEx categorizations may change

There are real-world circumstances and events that have caused CapEx and OpEx to be more beneficially categorized as the opposite expense. A real-world example where CapEx and OpEx decisions may have gone against usual business procedures was during the 2020 COVID-19 epidemic. The virus caused a work-from-home initiative that led to a wave of employees needing IT assets immediately in order to maintain business continuity. This led to organizations purchasing new assets rapidly and led to a chaotic acquisition process that may not have been as precise as usual. Once the quarantine was over and governments and cities were opening back up, the extra assets needed to be placed somewhere beneficial to the organization. During each phase of this event, CapEx and OpEx needed to be considered.

Rapid asset acquisition

The mandatory work-from-home order placed organizations into disarray due to the time constraints and lack of assets. This forced large, rapid acquisitions to occur to obtain enough assets for employees to work remotely. These major purchases may have been financially taxing to the organization. They may have changed the state the organization was in. If the organization was financially ahead, it might not have been anymore.

It is acceptable for an organization to go into debt for capital expenses. These expenses are used to improve the organization for the future, and they bring a handful of other benefits as well, like improving productivity. However, it is an issue for an organization to go into debt for operational expenses because OpEx are the costs of daily business function. If the cost is too high, it is burdensome on the organization and it can be difficult to get out of the ongoing debt. Knowing what may set the organization over the edge and into debt can be a useful tool, especially during that time.

The IT Asset Manager can meet with the financial team to ask what is the price range that is acceptable for either expense. With the knowledge given, the IT Asset Manager can know which assets to investigate for the purchase. Ones that fall out of the price range will not be acceptable. If the price range for either expense is too low for what is necessary, meeting with the financial team and explaining how much debt would be added is a great option to take. The financial team understands the organization’s finances better than any other department, so they will know how much of a risk the organization will be put into when taking on debt.

In order for an organization to not suffer under too much debt, the CapEx and OpEx decisions might need to balance out. For example, some organizations might not be able to take on such high expenses right away and may need to have it spread out across different accounting periods. This is where a CapEx categorization might be better because the price is more manageable and the organization will get tax write-offs. If an organization wants to avoid a capital expense, they may need to lease an asset. Vendors offer leasing of assets and other pay-as-you-go methods that make getting the assets more affordable. Each organization has a different circumstance, so an IT Asset Manager will need to consider their own organization’s position before making final decisions.

Acquired assets reentering the organization

The IT Asset Manager needs to know what the organization has in mind for the surplus of assets. What  state is the organization in? Did buying the assets set the organization back financially? Were the assets purchased or leased? Does the organization plan on keeping the extra assets? What is the organization’s plan for the future? Knowing the answers to these questions will help an IT Asset Manager make a decision on what to do with the extra assets. The IT Asset Manager will need to have a meeting with the financial team in order to fully understand the extent of how the acquisition affected the organization.

A deciding factor for the OpEx or CapEx question is what the plan will be for the unneeded assets. If the assets are going to be donated to charity, the organization will not get extra finances from the donation, but it will get tax write-offs. If the organization plans on reselling the IT assets, the organization will get money back from the original purchasing expense. This can be considered when deciding if it will be more beneficial to have the purchase be fully tax-deductible or to get to tax write-offs.

With certain acquisitions, there may not be an option to make the business expense differ from the usual categorization. For example, if certain assets are leased for only a few months, these cannot be written as anything other than OpEx because they do not extend beyond the accounting year. With these kinds of acquisitions, the IT Asset Manager might not have much control. Other acquisitions may have the ability to be written as a different business expense, and these may need to be altered to make the budget align closer with the financial goals.

Other real-world events may make the lines uncertain as to how one expense should be categorized over another. IT Asset Managers will need to stay aware of the different circumstances and stay in close communication with the financial team when considering the different business expenses. Seek answers from the financial team because they are always going to be a good resource for getting the organization’s financial goal CapEx and OpEx ranges.

Conclusion

When dealing with CapEx and OpEx, an IT Asset Manager needs to keep financial interest at the forefront of their mind in order to be successful. IT assets are always going to be needed in organizations, so trying to keep the costs as low as possible is what will help an organization grow. Learning how to categorize IT asset acquisitions will help benefit the organization in different ways, depending on if OpEx or CapEx is used. By using effective communication methods, IT Asset Managers and the financial team can work together and discuss matters to decide what will work best for an organization.

References

Maverick, J. B. (2020, March 17). Capital Expenditures vs. Operating Expenditures: What’s the Difference? Retrieved June 15, 2020, from https://www.investopedia.com/ask/answers/020915/what-difference-between-capex-and-opex.asp

Service, S. A. (n.d.). A Beginners Guide to Capex vs Opex. Retrieved June 15, 2020, from https://www.softwareadvisoryservice.com/en/whitepapers/a-beginners-guide-to-capex-vs-opex/